The Nexus of Monetary Policy and Financial Sector Development: Evidence from Tanzania's Post-Liberalization Era

This study examines the relationship between monetary policy and financial This study examines the relationship between monetary policy and financial sector development in Tanzania using annual data and an ARDL–ECM framework. Financial development is proxied by private sector credit to GDP. The monetary policy indicators included are policy rate, money supply, exchange rate, and lending interest rate. Unit root tests show mixed integration order of variables, which makes the ARDL method appropriate. The bounds test confirms that a long-run relationship exists among the variables. The estimation results indicate that higher policy and lending rates are associated with lower financial sector depth, while money supply and GDP growth show positive links with credit expansion. Exchange rate movements are also significant, although the direction depends on transmission channels and market response. Short-run dynamics suggest that deviations from equilibrium adjust at a relatively fast speed. Diagnostic checks support model reliability. The results suggest that careful monetary policy calibration is important for sustainable financial deepening and stable intermediation over time.